The strong expansion of Malaysia's Islamic finance, which pushed Islamic loan share to 27.9 per cent of system loans at end of the first half of this year, is likely to continue although at a more modest pace, said Fitch Ratings.

The rating agency said Malaysia continued to lead the global Islamic finance industry in terms of regulation, standardisation and sukuk issuance, representing more than half of the world's issuances at end of the first half of 2016.

Islamic banks in Malaysia had access to a Shariah liquidity facility from the central bank, an active Islamic capital market, interbank money market and secondary market," it said in its report titled "Malaysian Islamic Banks Dashboard 1H16".

Fitch said the Islamic banking system's gross impaired loan ratio rose slightly to 1.34 per cent at end of first half of this year, but remained better than the conventional banking system's ratio of 1.74 per cent.

The Islamic banking system's core equity Tier 1 ratio of 13.0 per cent was marginally lower than the 13.4 per cent of the aggregate banking system, it added.

Fitch said it believed a shift in appetite for investment accounts versus Islamic deposits largely reflected the higher yield offered by investment accounts.

The rating agency said it had not seen customer migration from Islamic banks to conventional banks or a significant change in Islamic banks' risk profiles. - BERNAMA